While it's true that headlines can quickly and sometimes
violently affect stock prices, they can also create exceptional
opportunities; Moody's (
) might just be the perfect example of a positive
Back in February the Department of Justice filed a civil suit
against Standard & Poor's (
) alleging that S&Pengaged in a scheme to defraud investors
in structured financial products known as Residential
Mortgage-Backed Securities (RMBS) and Collateralized Debt
The news sent shockwaves through the sector and gave MCO a 30%
haircut from its high. To be clear, Moody's is a competitor
of S&P and one of the three major CRAs in the world.
There may have been good reason to react that way, but it was no
Shares have recovered about 80% of that selloff, but there
might be even more upside from these levels.
A Necessary Niche
Moody's is an essential component of the global capital
markets. Their credit ratings, research, tools and analysis
are a trusted source for millions and help determine risk
allocations for everyone from average investors to sovereign
The average credit rating of a company (or countries) debt
directly affects what interest rate they have to pay to borrow
money and help those lenders understand just how much risk they
are taking on. Ratings are required by many investors to
even entertain any cash outlay.
Moody's one of three major agencies that offer this service
and they have done so for over a century. This is a company
that reported revenue of $2.7 billion in 2012 and employs
approximately 6,800 people worldwide in 28 countries; they're not
The world is not only becoming more integrated, but a great
deal of our lives and the stuff we buy (houses, etc) are becoming
securitized and need the services of Moody's to give the public a
sense of value and risk. Securitization of rental
properties are an up and coming industry that will require
Moody's services. Blackstone and Deutsche Bank are
introducing the first REO to rental securities and someone has to
"rate" their risk.
The reality is that business is forced in a sense to use
Moody's services and the greatest irony here is that when S&P
downgraded U.S. debt (which is what they should have done) they
got slapped with a lawsuit (most likely unrelated, but still odd
in my opinion).
The bottom line is that Moody's in a completely different
entity when compared to S&P or Fitch. Moody's makes
their decisions based on their own models and assumptions.
The models are obviously not fool-proof, but unless Moody's
participated in a grand scheme to defraud millions of investors
(which I don't think they did) or was in cahoots with S&P, I
don't think they are going anywhere; in fact, I think they will
continue to flourish!
Of course there is the reality that corporations and countries
pay companies like S&P and Moody's to get rated in the first
place. Some view this as a conflict of interest, but just
as a person might pay Sotheby's to appraise their fine art and
then have them sell it, it is Sotheby's job to be as honest as
possible to uphold their reputation and keep customers on both
sides coming back.
If the marketplace believed that Sotheby's was artificially
inflating prices, then they either don't pay the price or shun
In the subjective, intangible world of high finance, there are
Strong Earnings and Revenue Growth
Moody's reported upbeat fourth quarter results in early February,
showing strength in new domestic debt issuance and improving
clarity over regulatory climate in Europe.
They earned 75 cents per share, a 62.8% jump from the year-ago
quarter and beat the Zacks Consensus Estimate of 70 cents by
7.14%. The report marked the fourth consecutive quarter of
positive earnings surprises with an average beat of 10.4%.
The better-than-expected earnings were primarily driven by
33.0% surge in revenues and 53.7% jump in operating income.
Based on the strong results, Moody's provided optimistic
guidance for fiscal 2013. Moody's expects 2013 revenues to grow
in the high single-digit percent range. Operating margin is
projected to be between 46% and 47%. Earnings for 2013 are
expected to be in the range of $3.45 to $3.55 per share.
The Zacks Consensus Estimate for fiscal 2013 increased 9.1% to
$3.49 per share as most of the estimates were revised higher over
the last 60 days. The current estimate is within the guidance
range provided by Moody's. For fiscal 2014, the Zacks Consensus
Estimate has again increased to $3.81 per share.
The long-term expected earnings growth rate for Moody's is
14.0%, which easily justifies their forward multiple of 15 in my
Moody's has been in a bullish ascending channel sings the
correction in early February. Shares never closed below the
200 day moving average and the 50 day moving average still
remains firmly above the 200, both positive signs for the
The current 50 day simple moving average of $50.54 coincides
with past support in the current short term trend. Looking
below that, traders can also use the 50 day WVAP of $48.53 as
strong support. The VWAP is so much lower than the regular
50 day average due to all the volume that changed hands during
the S&P debacle.
To the upside, look for a target of $55.14, which is just
under the 52 week high of $55.58. That might be an area to
take small profits. If shares break through that level with
better than average volume, we could see a breakout run of 5% or
Earnings are due out April 25th and with its Zacks Rank of 1 and
positive ESP of $4.65%, there is a strong likelihood that they
will beat the Zacks Consensus. The company has already
offered positive guidance for the year, we need to see that stay
intact and for revenues to be growing as well.
Moody's is certainly a stock I wouldn't mind owning here.
Jared A Levy is one of the most highly sought after traders in
the world and a former member of three major stock exchanges.
That is why you will frequently see him appear on Fox Business,
CNBC and Bloomberg providing his timely insights to other
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"Your Options Handbook"
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. You can discover more of his insights and recommendations
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